Archive for February 2012

[Greg Ip] LIKE the weather, American politicians talk a lot about tax reform but do nothing about it. Which is a pity, because while Americans have been talking, other countries have been doing; since the late 1980s, top corporate tax rates around the world have dropped to a point that America’s, once below the international average, is now well above.

As this has happened, American-based multinational companies have shifted more activity offshore; their foreign employment steadily rose over the last decade as domestic employment fell. This is mostly because of the appeal of cheap labour and growing markets in the emerging world, but business groups and many economists think America’s tax rate is also to blame. Liberal analysts blame the tax code for a different reason: it allows multinationals to stash income in foreign havens and indefinitely defer taxes on it, encouraging the outsourcing of jobs.

[Greg Ip]The Free Exchange column in this week’s print edition is a guest article by Mario Blejer and Guillermo Ortiz, former central-bank governors of Argentina and Mexico respectively. They note that some advocates of Greek exit from the euro cite Argentina’s abandonment of its currency board in 2002. The peso devaluation that followed the collapse of the currency board led to a boom in Argentine exports and growth. Mr Blejer and Ortiz say these advocates understate the chaos that occurred in Argentina, and how much worse it would be in Greece: Read the rest of this entry »

Politics has tied budget-making in knots

[Greg Ip] Feb 18th 2012 | WASHINGTON, DC | from the print edition

BACK in 2009 Barack Obama’s first budget called for repealing his predecessor’s tax cuts on the rich, eliminating tax breaks for multinationals and boosting the tax rate on capital gains. A year later Mr Obama repeated those proposals, and added new ones: no more breaks for fossil-fuel producers and a “financial crisis responsibility fee” on banks.

On February 13th Mr Obama issued his fourth budget. Besides recycling the proposed tax increases of previous years, it also proposes repealing the preferential tax rate on dividends for the wealthy, and penalising multinationals that outsource jobs. In all, the budget would raise taxes on companies and the wealthy by $2 trillion over the next ten years.

There is little reason to think Congress is any more likely to grant those tax increases than their predecessors. Of course, Congress tends to be unco-operative when it comes to fiscal matters; since the House holds the purse-strings, a president’s budget has always been as much aspiration as road map. But the gap between aspiration and reality is now enormous. Mr Obama’s first budget foresaw the budget deficit, then roughly 10% of GDP, falling to 3.5% this year. Instead, it will clock in at 8.5% (see chart). The public debt was supposed to peak at 67% in 2011. Mr Obama now sees that happening in 2014, at 78%.

In part that is because of a worse than expected economic situation. A smaller economy puts upward pressure on debt and deficit ratios, and leads politicians to shift priorities—sensibly—from balancing the budget to stimulating growth. Read the rest of this entry »

Rule-making is being made to look more beneficial under Barack Obama

Feb 18th 2012 | WASHINGTON, DC | from the print edition

[Greg Ip]IN DECEMBER Barack Obama trumpeted a new standard for mercury emissions from power plants. The rule, he boasted, would prevent thousands of premature deaths, heart attacks and asthma cases. The Environmental Protection Agency (EPA) reckoned these benefits were worth up to $90 billion a year, far above their $10 billion-a-year cost. Mr Obama took a swipe at past administrations for not implementing this “common-sense, cost-effective standard”.

A casual listener would have assumed that all these benefits came from reduced mercury. In fact, reduced mercury explained none of the purported future reduction in deaths, heart attacks and asthma, and less than 0.01% of the monetary benefits. Instead, almost all the benefits came from concomitant reductions in a pollutant that was not the principal target of the rule: namely, fine particles.

The minutiae of how regulators calculate benefits may seem arcane, but matters a lot. When businesses complain that Mr Obama has burdened them with costly new rules, his advisers respond that those costs are more than justified by even higher benefits. His Office of Information and Regulatory Affairs (OIRA), which vets the red tape spewing out of the federal apparatus, reckons the “net benefit” of the rules passed in 2009-10 is greater than in the first two years of the administrations of either George Bush junior or Bill Clinton.

But those calculations have been criticised for resting on assumptions that yield higher benefits and lower costs. One of these assumptions is the generous use of ancillary benefits, or “co-benefits”, such as reductions in fine particles as a result of a rule targeting mercury.

Mr Obama’s advisers note that co-benefits have long been included in regulatory cost-benefit analysis. The logic is sound. For instance, someone may cycle to work principally to save money on fuel, parking or bus fares, but also to get more exercise. Both sorts of benefit should be counted. Read the rest of this entry »

[Greg Ip]Republicans have relentlessly harangued the Senate’s Democratic leadership for failing to pass a budget resolution. “1,000 days without a budget,” was the title of a typical missive last month. On the weekend Jack Lew, who has just been named Barack Obama’s chief of staff after serving as his budget director, defended the Senate by saying it couldn’t pass a budget without 60 votes, i.e. without the cooperation of some Republicans. Republicans jumped on Mr Lew, pointing out that under Congress’ budget procedure, a budget resolution cannot be filibustered and thus only needs a simple majority vote – typically 51 votes – to pass. Glenn Kessler, The Washington Post’s fact checker, awarded Mr Lew four Pinocchios, the top score, for fibbing. Read the rest of this entry »

Employment springs to life; will it fade again?

[Greg Ip] Feb 11th 2012 | WASHINGTON, DC | from the print edition

EVEN people who don’t normally care much for football tune in to the Super Bowl to watch the best commercials Madison Avenue can dream up. The most talked about this year was Chrysler’s gritty tribute to the economic revival of America and Detroit. More short film than commercial, it ends with the actor Clint Eastwood huskily declaring that “Our second half is about to begin.”

The muscular patriotism brought lumps to the throats of sentimental viewers; the more cynically minded called it a re-election ad for Barack Obama, whose administration saved Chrysler from oblivion with a bail-out in 2009. A better explanation may simply be timing: it coincides with the best evidence in months that America’s economy, led by manufacturing, really is on the mend.

Five days before its ad aired, Chrysler, now part of Italy’s Fiat, reported its best January sales since 2008, up 44% from a year earlier. The next day it announced it would hire 1,800 people at a plant in Belvidere, Illinois, to build its new Dodge Dart. The good news is hardly confined to Chrysler. The auto industry as a whole sold 1.2m vehicles in January, many more than expected, and a 4% increase from December. Read the rest of this entry »